CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control
Narmada Foods evaluates a project with an initial outlay of Rs 8,00,000. Annual cash inflows are Rs 3,00,000 in each of years 1 to 4 and then Rs 2,00,000 in year 5. What is the payback period?
Payback is 2.67 years. Two years of inflows recover Rs 6,00,000, leaving Rs 2,00,000 to be recovered from the third-year inflow of Rs 3,00,000, which takes two-thirds of that year. Payback is therefore 2 plus 0.67 years.
- A2.67 yearsCorrect
- B3.00 years
- C2.50 years
- D3.50 years
Explanation
Cumulative inflow after 2 years is 6,00,000; the remaining 2,00,000 is recovered in year 3 at 3,00,000 per year, i.e. 2/3 = 0.67. Payback = 2.67 years. Using the average inflow of 2,80,000 would give 2.86, which is wrong.
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